Once Again, Renren Inc. Is No Facebook

Renren has another nasty quarter, but don't dismiss the company just yet.

May 22, 2014 at 3:45PM

Renren (NYSE:RENN) posted a rare quarterly profit Wednesday evening, but that's as accurate as when investors were trying to pass the Chinese social networking website operator off as the Facebook (NASDAQ:FB) of China a couple of years ago.  

The profit is certainly real on a reported basis. Renren sold its Nuomi group-buying operations to Baidu (NASDAQ:BIDU) for a tidy profit, and that needs to be recorded. However, the sale of its lone growing business to Baidu is a one-time event. Renren would've posted a widening quarterly loss if it wasn't for the sale of Nuomi and other marketable securities. Renren's operating loss actually worsened during the period, falling to $29.2 million from $20.4 million a year earlier.

That's bad, but Renren's top-line performance is even worse. Facebook is a market darling -- or at least it was before the recent tech stock correction -- because it's a profitable and growing business. It's a scalable model that's coming into its own on the monetization front, and that finds investors riding a booming platform with more than 1.2 billion people.

Renren isn't even close. For starters, its popularity is going the wrong way. Monthly unique users logging into Renren have fallen from 57 million a year ago to 51 million today. You can be sure that Facebook investors would be scrambling for the exits if the company saw a better than 10% drop in active users. The shift from desktop to mobile has also stung monetization efforts. Revenue from Renren's namesake website dipped 17% to $12.2 million, dragged down by a 19% dive in online advertising revenue.

Things are going even worse for the online gaming operations that Renren was once able to use to offset the slowing growth at its social networking hub. Renren's online gaming division saw its revenue plunge 53% to $12.7 million. Overall, net revenue dropped 40% to $24.9 million, shy of the already-bleak $25.7 million that Wall Street was targeting.

Things won't be getting any better anytime soon. Facebook is growing. Baidu is growing. Renren is not. It is forecasting $21 million to $23 million in revenue for the current quarter, and that's a brutal 47% to 52% lower than what it generated a year earlier. You'll also notice that this represents yet another sequential decline at Renren, something that analysts naively thought wouldn't happen by forecasting revenue to top $30 million.

As horrendous as this all seems, the one thing keeping Renren's stock from sinking even lower is that it's already trading for little more than the $1.1 billion on its balance sheet in cash and investments. This may not seem like much of a floor if steep operating losses continue. It doesn't have another pretty Nuomi to marry off. However, if it can use its ample reserves to reinvent itself -- and it will have plenty of time to do that -- there's something to this company where its current operations are being valued as worthless by Mr. Market. Renren's the ugliest stock that you don't want to short because of the limited downside here, so keep watching to see if it finds the secret formula to get the last laugh on Wall Street.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Baidu and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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